Solution for The Future of Central Banking and Financial Market Reform

The global financial crisis has revealed regulatory failure in financial markets and demonstrated the urgent need for reform. In particular, it is now widely accepted that in addition to established m ...

The global financial crisis has revealed regulatory failure in financial markets and demonstrated the urgent need for reform. In particular, it is now widely accepted that in addition to established microprudential policies, macroprudential policies aimed at increasing the stability of the financial sector as a whole are imperative. But an active debate has emerged over what role the central bank should play with this augmented set of policies.

Central banks should increase the transparency of their decision-making to deal with increased uncertainty and maintain their credibility

Central banks should be very transparent and clear about what their policy goals and instruments are. This will maintain their credibility in light of concerns that their financial stability mandate will lead to conflicts of interest. It will also reduce global uncertainty about monetary policy, possibly allowing foreign central banks to devise appropriate policy responses to reduce risks from sudden stops and currency crises.